Tony Abbott has paid lip service to tax reform, but his government’s latest measures only serve to make corporate avoidance easier.
By Mike Seccombe.

The buried treasures of corporate tax avoidance

The prime minister addressing the World Economic Forum in Davos in January.

Credit: AP

How do you define a small business? Would you consider a business small if, for example, it was a multinational corporation with equity of, say, $15 million, whose Australian arm had borrowed $20 million from its offshore arm?

Probably not. And nor would the federal government, in most circumstances. But the Abbott government took an expansive view of what constituted a “small business” recently when it announced its intention to abandon some of the measures proposed by the former Labor government to discourage corporate tax avoidance.

We are talking in particular about section 25-90 of the tax act, the “thin capitalisation” rules. The term is eye-glazingly anodyne, but the tax rort to which it refers is pretty simple.

“That’s where a company structures its operations so it loads up a subsidiary with debt – money borrowed from a related company offshore – and then claims the interest as a tax deduction. That reduces the profits in Australia and shifts them offshore,” says Mark Zirnsak, director of the Justice and International Mission Unit of the Uniting Church, an expert in the many and varied ways by which multinational companies dodge tax.

The previous government’s last budget announced steps to limit this form of corporate tax avoidance, reducing the amount of debt that could be loaded onto the Australian arms of multinational companies by halving the allowable debt to equity ratio. Once your ratio passed 1.5 to 1, and your total interest repayments exceeded $250,000 a year, the taxman would start asking hard questions.

Treasury calculated that the government would claw back about $1.5 billion in revenue over four years as a result of the change. But Labor did not manage to get the legislation through before it was tipped out of office.

Tony Abbott and Joe Hockey both paid lip service to the reform agenda. In his January address to the World Economic Forum in Davos, Switzerland, the new prime minister acknowledged countries’ tax regimes had “not always kept up with the rise of services and the pervasiveness of digital technologies” allowing multinationals to “take advantage”.

He promised: “The G20 will continue to tackle businesses artificially generating profits to chase tax opportunities rather than market ones.”

But there are words, and there are actions. The incoming Abbott government promptly announced it would make changes to Labor’s “thin cap” proposal, and increase the de minimis threshold for interest repayments eightfold, from $250,000 to $2 million. The purported reason was to spare small business compliance costs. Which rather redefines the term “small business”, says Zirnsak.

“I ask you, how many small businesses do offshore interest repayments of $2 million? It doesn’t sound like your corner fish and chip shop.”

No indeed. The winners from this change are multinational companies worth tens of millions in combined debt and equity. That’s not small by any of the usual definitions.

Nor is the cost to government revenue small: an estimated $600 million. Add in a couple of other anti-avoidance measures that the new government has wound back and the amount of forgone revenue comes to about $1.1 billion.

Says tax law expert Antony Ting, from the University of Sydney Business School: “This government appears to be less eager than its predecessor in closing a tax loophole that allows deduction of interest expenses incurred to generate exempt dividend income.”

And there were other indications in the budget, too, of the government’s attitude. Two of the agencies most heavily hit by its cuts to the public service were the tax office, slated to have its staff reduced by 2300, or about 10 per cent, and the corporate watchdog, the Australian Securities and Investments Commission, down about 200 staff, or 11 per cent.

While the companies that will benefit from the relaxation of the debt threshold are not really small businesses, they are not huge, either. And that’s the real point: in the new, wired world, tax avoidance has become an option for lots of people.

When people think about corporate tax avoidance, they tend to think of giant corporations such as Apple and Google that dodge tax on a truly Homeric scale.

You might have seen the news reports a year or so back about Google’s filing to ASIC, showing it had paid just $74,176 in tax in Australia on estimated revenue of somewhere close to $1 billion. Had it paid the full corporate rate, and not managed to move profits offshore, it would have been up for as much as $300 million.

In a recent analysis for the British Tax Review, Ting describes how Apple employed a somewhat different strategy to shelter $US44 billion between 2009 and 2012 from taxation anywhere in the world. He calls it the “iTax” scheme.

An example of how it works: when someone in Australia buys an iPad for $600, it is recorded as revenue by the distribution subsidiary here. But this company “purchases” the iPad from another Apple subsidiary incorporated in Ireland for $A550.

“The Irish subsidiary is basically a shell company with no employees and no factory. The iPad was manufactured through third-party contract manufacturers in China, who shipped it directly to Australia,” writes Ting.

The two salient points here are that Ting concludes that the US government has been “knowingly facilitating the avoidance of foreign income tax by its multinationals”, and that in tax avoidance, as in so many other areas, where the US leads, others follow, even if they don’t use exactly the same methods.

Big business tax havens

Companies everywhere have become much more aggressive about minimising their tax. Last year Mark Zirnsak set out to compile a list of tax-haven subsidiaries of Australia’s top-100 companies. He found hundreds of them.

All the big banks had them. Some companies had many: AMP had 15, Computershare 18, Telstra 19, Downer EDI 32, Toll Holdings 64, Goodman group 67. Way out ahead of the pack was Rupert Murdoch’s News Corp with 146.

None of this indicates illegality. And that’s just the problem. Multinational corporations and their enablers in big accounting and legal firms have proved very adept at moving money around the world, arbitraging different tax systems.

Sometimes they do have legitimate operations in low tax jurisdictions. But often not.

Zirnsak, in association with various tax experts, is trying to update the list to give a better idea of just how “aggressive” the tax arrangements of various companies are. It’s proving difficult, though.

“I hadn’t realised [at the time of doing the first list] that Australian companies aren’t required to disclose all their subsidiaries unless they deem them ‘material’ to their operations,” he says. “So if a company decides laundering $10 million through a secrecy jurisdiction in order to avoid paying tax is not material to its operations, it needn’t reveal that subsidiary.

“Westfield, for example: we identified 56 subsidiaries in their 2010 report. If you look at their 2013 report, they don’t disclose a single subsidiary in Jersey or Luxembourg, even though we know they have them.”

A recent investigation of Westfield’s tax affairs for the union United Voice found the Westfield Group’s average corporate tax rate was just 8 per cent over the nine years to December 2013, compared with an average 22 per cent for Australia’s other top-200 companies.

The big picture here is that corporate tax avoidance is a massive global problem, although no one knows exactly how big. But in a report out last year the OECD left no doubt about its seriousness: “What is at stake is the integrity of the corporate income tax.”

Having done not very much about it over a long time, the world governments and their collective entities, such as the OECD and G20, are now moving to address the problem, which they refer to by the acronym BEPS, for base erosion and profit shifting. And some progress has been made.

First, says deputy tax commissioner Mark Konza, Australia actually has one of the better regimes, as it must, given roughly half our GDP is in international trade, and half of that is between related parties. He says that is thanks to action by a succession of previous governments, notably the previous one.

Reforms passed last year, under Labor, give us what he calls “effectively the most modern and effective transfer pricing rules in the world”. From next year, the tax office will start publishing more detail of the tax actually paid by companies with revenue of more than $100 million.

As for the current government, he says, we’ll wait and see what comes out of its white paper on taxation. And as for the decision to walk back the thin capitalisation rules, he is diplomatic: “Where the limit is put is a matter for government.”

On the international front, says Konza, progress is also being made. The agreement of common reporting standards and the automatic exchange of information between tax authorities, he says, “is going to be very important for ensuring an end to bank secrecy”.

“My observation is that countries are becoming very sensitive to being identified as secrecy jurisdictions.”

The larger countries are increasingly realising the need to be more open. And the little countries will find themselves increasingly marginalised over time.

“I won’t comment on other countries, because I have to deal with them … but I can comment that the British prime minister brought all the British protectorates in and told them all, as a group, to join up.”

He might not name them, but he’s talking about places such as the British Virgin Islands and Cayman Islands, through whose secretive financial system trillions of dollars are currently laundered for tax-avoidance purposes.

The next big step, Konza hopes, will be mandatory country-by-country reporting by multinationals, which will make profit shifting much more obvious.

“I think that’s an important development, especially for the developing world, who perhaps don’t get a very good picture of companies’ international transactions and arrangements,” he says. “I think there will be substantial progress both this year and probably more next year … [but] we’ll be working on this for a long time yet.”

Ultimately, says Konza, “It’s more of a diplomatic and political process than a technical process”.

In other words, what we need is governments that are open to reform, not just open for business.

This article was first published in the print edition of The Saturday Paper on
Jun 7, 2014 as "Buried treasures".
Subscribe here.

Mike Seccombe
As public faith in democracy collapses, the institution is further undermined by suspect polling, gormless politics and a media dependent on both.When the numbers don’t mean much, meaning must be attached to them. As the example of the recent Liberal coup shows, that can lead to disaster.

Mark Davis
The Indonesian military has employed airstrikes in West Papua – suspected to include the banned chemical weapon white phosphorus – as a retaliation for murders following a flag-raising protest.

Abdul Karim Hekmat
Four out of five asylum seekers in Australia will be left destitute and homeless next year after further planned cuts to support services. Sadoullah Malakooti, appealing the rejection of his refugee application, is among them.

Leah Jing McIntosh
Robin DiAngelo knows a lot about white privilege – it’s in her DNA. The American academic, author and anti-racism advocate talks about how structures of whiteness and so-called white progressives are continuing to damage the lives of people of colour. ‘I grew up in poverty … I was a feminist for most of my life before I realised I could also be an oppressor. But I draw from my experience of oppression … I think that helps. The key is not to exempt myself from being an oppressor, just because I experience oppression. Ask anyone if they’d rather be poor and white or poor and brown – I knew I was poor, but I also knew I was white.’

Wesley Enoch
Change the date, don’t change the date – I am agnostic. I think a national day could be a valuable tool in the binding of a nation, but only if it finds ways of including the three narratives, as Pearson has described them. I can imagine a three-stage national day of the future, one that stretches from our long First Nations history, through the narrative of the British arrival, to the waves of immigrant arrivals and life here now. Past, present and future.

Paul Bongiorno
The Prime Minister’s Office insists Morrison only learnt about Broad’s use of a website for ‘sugar daddy’ arrangements on the day New Idea broke the story. It is simply an incredible and grave dereliction of duty on McCormack’s part. He lamely claims he doesn’t ‘tell the prime minister everything about every member of parliament’ because he ‘has enough on his mind’.

Richard Ackland
It’s the annual speech day at St Brutes, the very private non-selective school and training ground for future Nasty Party boiler room operatives and their underlings in Cockies Corner at the other end of the dorm. The headmaster, Mr Morrison, was hoping for a speech day built around the theme of “fair dinkum” – to reflect the authenticity of Australia and its values. A cat was set among the pigeons, though, when it came to light that “fair dinkum” was actually an authentic Chinese expression from the goldfields of the 1890s.

Always, there was some spectre, some looming threat – a capricious American president, the North Korean nuclear arsenal, Russia’s cyber sabotage, the possibility of Brexit’s economic devastation, the inevitability of climate disaster. We lived, in 2018, at the edge of chaos. Faced with chaos, it is human to attempt to find order. The impulse is one that tends from sense towards containment, control. It is no coincidence this year of ataxia spurred authoritarianism.

Martin McKenzie-Murray
In a year bookended by National Party MPs in disgrace, we saw big banks and cricketers shamed, international politics teeter and literary and musical icons shuffle off this mortal coil. A look back at the year that was.

Helen Razer
The Golden Age of television is giving way to a period more gilded, but streaming giant Netflix has still bankrolled some worthy viewing this year, in the form of Dumplin’ and American Vandal.

Miriam Cosic
Bursting with colour, overwrought with emotion and rich in symbolism – the grandiloquent works of the Pre-Raphaelite Brotherhood leave the Tate to enliven the walls of the NGA in an exhibition powerful enough to convert even a non-fan.

Martin McKenzie-Murray
For cricket fans disillusioned and despondent over Australia’s ignominious fall from Test cricket grace, the current series against India promises the best Christmas gift of all.

Mike Seccombe
As public faith in democracy collapses, the institution is further undermined by suspect polling, gormless politics and a media dependent on both.When the numbers don’t mean much, meaning must be attached to them. As the example of the recent Liberal coup shows, that can lead to disaster.

Mark Davis
The Indonesian military has employed airstrikes in West Papua – suspected to include the banned chemical weapon white phosphorus – as a retaliation for murders following a flag-raising protest.

Abdul Karim Hekmat
Four out of five asylum seekers in Australia will be left destitute and homeless next year after further planned cuts to support services. Sadoullah Malakooti, appealing the rejection of his refugee application, is among them.

Leah Jing McIntosh
Robin DiAngelo knows a lot about white privilege – it’s in her DNA. The American academic, author and anti-racism advocate talks about how structures of whiteness and so-called white progressives are continuing to damage the lives of people of colour. ‘I grew up in poverty … I was a feminist for most of my life before I realised I could also be an oppressor. But I draw from my experience of oppression … I think that helps. The key is not to exempt myself from being an oppressor, just because I experience oppression. Ask anyone if they’d rather be poor and white or poor and brown – I knew I was poor, but I also knew I was white.’

Wesley Enoch
Change the date, don’t change the date – I am agnostic. I think a national day could be a valuable tool in the binding of a nation, but only if it finds ways of including the three narratives, as Pearson has described them. I can imagine a three-stage national day of the future, one that stretches from our long First Nations history, through the narrative of the British arrival, to the waves of immigrant arrivals and life here now. Past, present and future.

Paul Bongiorno
The Prime Minister’s Office insists Morrison only learnt about Broad’s use of a website for ‘sugar daddy’ arrangements on the day New Idea broke the story. It is simply an incredible and grave dereliction of duty on McCormack’s part. He lamely claims he doesn’t ‘tell the prime minister everything about every member of parliament’ because he ‘has enough on his mind’.

Richard Ackland
It’s the annual speech day at St Brutes, the very private non-selective school and training ground for future Nasty Party boiler room operatives and their underlings in Cockies Corner at the other end of the dorm. The headmaster, Mr Morrison, was hoping for a speech day built around the theme of “fair dinkum” – to reflect the authenticity of Australia and its values. A cat was set among the pigeons, though, when it came to light that “fair dinkum” was actually an authentic Chinese expression from the goldfields of the 1890s.

Always, there was some spectre, some looming threat – a capricious American president, the North Korean nuclear arsenal, Russia’s cyber sabotage, the possibility of Brexit’s economic devastation, the inevitability of climate disaster. We lived, in 2018, at the edge of chaos. Faced with chaos, it is human to attempt to find order. The impulse is one that tends from sense towards containment, control. It is no coincidence this year of ataxia spurred authoritarianism.

Martin McKenzie-Murray
In a year bookended by National Party MPs in disgrace, we saw big banks and cricketers shamed, international politics teeter and literary and musical icons shuffle off this mortal coil. A look back at the year that was.

Helen Razer
The Golden Age of television is giving way to a period more gilded, but streaming giant Netflix has still bankrolled some worthy viewing this year, in the form of Dumplin’ and American Vandal.

Miriam Cosic
Bursting with colour, overwrought with emotion and rich in symbolism – the grandiloquent works of the Pre-Raphaelite Brotherhood leave the Tate to enliven the walls of the NGA in an exhibition powerful enough to convert even a non-fan.

Martin McKenzie-Murray
For cricket fans disillusioned and despondent over Australia’s ignominious fall from Test cricket grace, the current series against India promises the best Christmas gift of all.